1. Learning Objectives LO1 Describe the conceptual audit risk model and its components. LO2 Explain the usefulness and limitations of the audit risk model in conducting the audit. LO3 Explain how auditors assess the auditee’s business risk through strategic analysis and business process analysis. LO4 Outline the relationships among the business processes and accounting processes or cycles that comprise an organization’s information system and management’s general purpose financial statements. 1

2. Business Risk-Based Approach to Auditing The business risk-based approach to auditing requires the auditor to understand the auditee’s business risks, management’s strategy for addressing those risks, and the business processes it uses to implement the strategy. LO3 2

3. Business Risk Analysis There are two parts of business analysis: 1. Strategic analysis, and 2. Business process analysis. At the end of the business analysis, the auditor should be able to determine if there are any weaknesses in the client’s risk management process that could lead to misstatement on the financial statements. LO3 3

4. Strategic Analysis Gain an understanding from senior client management about:  business objectives,  key strategies employed to meet those objectives, and  risks that threaten achievement of those objectives. LO3 4

5. Business Process Analysis Management will minimize risks through well- designed business processes.  Business success depends on how well management can execute the main aspects of strategy. Business process analysis deepens the auditor’s understanding of the client’s operations.  It may also highlight risks and possible note disclosures. LO3 5

6. Effects of IT and E-Commerce on Business Risk Analyzing the effects of IT and e-commerce is also an important component of business risk analysis.  More involvement in e-commerce and more complex information systems create new business risks.  The auditor needs to understand how e- commerce and IT integrate into the business processes. LO3 6

7. Business Performance Analysis and Management’s Financial Statements Business performance analysis will consider financial and nonfinancial performance measures and the interrelationships between the two.  Is the analysis of business performance reflected in the financial statements? LO3 7

8. Financial Performance Analysis Financial performance analysis continues the analytical procedures started earlier.  Includes a review of management’s significant accounting policy choices.  Includes benchmarking accounting policies against the industry.  Consider the quality of earnings. LO3 8

9. Nonfinancial Performance Analysis Analyzing the relationships among the business’s resources, the processes for using resources and the ability to compete in the markets for products or services.  Determine if the resources available, and the processes used are consistent with marketplace results. LO3 9

10. Interrelationships Between Financial and Nonfinancial Performance The auditor considers whether the financial results and nonfinancial performance are consistent. LO3 10